Apple stock rise could have meant $4.5 billion for Microsoft

In 1997, Microsoft made a $150 million investment in "beleaguered" Apple. …

Apple reached a major milestone Wednesday when the company's market capitalization surpassed that of Microsoft for the first time since 1990, making it the number one technology company by market cap. In the last several years, Apple has been firing on all cylinders with the launch of the iPhone and iPad while growing its Mac business to record sales. Apple's meteoric rise in stock value over the last couple years put its market cap ahead of Microsoft, whose stock has been slipping recently. Apple's good fortune could have been good for Microsoft's balance sheet, however; the software giant could have made almost $5 billion in profit had it held on to its AAPL stock for a little longer.

Microsoft's market cap rose sharply throughout the 1990s, peaking at around $556 billion at the beginning of 2000. Apple was most often referred to as "beleaguered" during that dark decade, barely rising above a few billion in market cap before Steve Jobs returned to the company in 1996. Before launching the iconic iMac in 1998, however, Steve Jobs made a deal with Microsoft to help Apple weather some tough times while it worked on launching a series of new products and returning to profitability.

That 1997 deal included patent and technology cross-licensing agreements between Apple and Microsoft, Microsoft committing to creating new Mac versions of Office and Internet Explorer for the following five years, and Apple agreeing to install Internet Explorer as the default Web browser on all shipping Macs during that time period. Additionally, Microsoft invested in Apple to the tune of $150 million dollars.

In Apple's 2003 10-K filing with the SEC, the company revealed that Microsoft's $150 million investment bought the company 150,000 shares of Series A nonvoting convertible preferred stock at $1,000 per share. Microsoft had the option after August 5, 2000 to convert those preferred shares, for $8.25 per share, into common stock. In 2000, Microsoft converted a little under half its shares into 9 million shares of common stock. It then converted the remainder in 2001 into another 9.2 million shares.

All told, Microsoft spent a little over $151 million to acquire 18.2 million shares of Apple stock, for roughly $8.31 per share. Microsoft confirmed that it sold all of its AAPL holdings some time ago, and likely did so at a healthy profit—after all, AAPL has traded significantly higher than $8 for many years. But what if Microsoft had held on to that investment just a little longer?

As of approximately noon CDT Thursday, AAPL was trading at $250.99. That translates to a value of $4.57 billion, which would represent a staggering 3,000 percent ROI had Microsoft held on to those 18.2 million shares.

At its recent record peak at the end of April, AAPL was trading even higher, at $272 per share. Had Microsoft cashed out then, it would have had an extra $4.95 billion in its pocket—a nearly 3,200 percent ROI.

Since Steve Ballmer took over as Microsoft's CEO, the company's market cap has dropped to less than half its peak value, currently hovering around $219 billion. Ballmer recently downplayed the significance of the market cap drop by pointing out that Microsoft still earns far more profit that Apple. "I will make more profits and certainly there is no technology company in the planet which is as profitable as we are," Ballmer said earlier today during a press conference in New Delhi. "Stock markets will take care of the rest."

Apple is closing the profit gap as well. For the first quarter of 2010, Microsoft reported profits of $4 billion on $14.5 billion in revenue. Apple made $3 billion on $13.5 billion in revenue in the same period. Apple has made enormous strides in the last decade, earning its place as one of the top technology companies in the world.

We don't know exactly when they sold them; Microsoft only confirmed that it happened "some time ago." Some where likely sold in 2003; Apple specifically mentioned a stock buyback program then. I know there have been at least a couple more since then.

Every time I look at Microsoft's revenue numbers, my head explodes. Truly amazing.

And goddamn they should be doing way cooler things than they do. They have an amazing R&D department and publish a ton of papers but they don't actually DO anything. I really wonder how much Ballmer has to do with it all. Everyone vilifies Billy G but I think he was pretty levelheaded most of the time.

Like for example that one story from an MS employee of someone showing Bill Gates XBMC in the Xbox Huge era

Few of my friends, family, and associates have anything Apple other than the occasional iPod, and a small handful of iPhones. However, they all use Microsoft products at home and work (including MS peripherals, a couple of Zunes, etc). Makes me look at those numbers and wonder just how much markup there is on Apple's gadgets.

I don't get the excitment around apple's market cap being greater than microsoft. First, they are wholly different companies selling different products. Microsoft is a software company and Apple is a gadget company. You might as well get excited about Wallmart surpassing Boeing. Second, marketcap is not a reflection of the real value of a company because of the role of investor psycology.

I also think that Apples explosive growth cannot be maintained. Microsoft owned the 90's and Apple the 00's. It will be interesting to see who owns this decade. My guess is google as they seem to know that the key to the future will be getting people to use your cloud based services that will work on any hardware anywhere. That is, to become a universal software service. Once things migrate to the cloud, being tied to an operating system or a hardware company will cease. But of course, I'm no Steve Jobs.

I don't get the excitment around apple's market cap being greater than microsoft. First, they are wholly different companies selling different products. Microsoft is a software company and Apple is a gadget company. You might as well get excited about Wallmart surpassing Boeing. Second, marketcap is not a reflection of the real value of a company because of the role of investor psycology.

Thats not been true for a while. Its hard for me to think of a single new Apple product that MS does not have a direct competitor (and in some cases, competitors) or a potential competitor to. (Edit: Of course, I missed the biggie. Macs. But that isn't the biggest source of Apple's profits. And probably routers).

"I will make more profits and..." Pathetic that he takes credit for profits that were created a long time ago under Gates, and just keep rolling in, in spite of him. What has he done while he presided over the evaporation of half of his shareholders' equity, other than make idiotic proclamations (iPhone) and bad slapstick comedy (developers)? How can I get his job? I could not possibly do any worse?

"I will make more profits and certainly there is no technology company in the planet which is as profitable as we are," Ballmer said earlier today

So that means the Microsoft tax is much higher than the Apple tax?

I think it's the fact they're actually in different industries - Microsoft is software, Apple is Hardware. Yeah, there's crossover between them, but that's their primary market. And, for what it's worth, Apple's software division (ignoring iTunes apps, which are largely third-party) doesn't do as well as Microsoft and Microsoft's hardware doesn't do as well as Apple's.

It makes sense when you consider Apple started as a hardware company that, by necessity, expanded into software. Microsoft initially got into hardware (like mice) simply because they weren't that common on PCs at one point or had synergy with Windows, then later went into other hardware fields in order to expand their revenue stream by getting a foothold in other markets (which has largely been a bust for them).

So, when you get down to it, they both have a "tax" but it depends on what aspect of the IT industry you're talking about.

Thats not been true for a while. Its hard for me to think of a single new Apple product that MS does not have a direct competitor (and in some cases, competitors) or a potential competitor to. (Edit: Of course, I missed the biggie. Macs. But that isn't the biggest source of Apple's profits. And probably routers).

Apple's product line is a subset of Microsoft's.

Which makes this all that more remarkable.

The fact is Apple's profits come from hardware and digital music retailing, Ms' from software.

I don't get the excitment around apple's market cap being greater than microsoft. First, they are wholly different companies selling different products. Microsoft is a software company and Apple is a gadget company. You might as well get excited about Wallmart surpassing Boeing. Second, marketcap is not a reflection of the real value of a company because of the role of investor psycology.

Thats not been true for a while. Its hard for me to think of a single new Apple product that MS does not have a direct competitor (and in some cases, competitors) or a potential competitor to. (Edit: Of course, I missed the biggie. Macs. But that isn't the biggest source of Apple's profits. And probably routers).

Apple's product line is a subset of Microsoft's.

Which makes this all that more remarkable.

What do you mean? Apple makes boutique PCs, designer laptops, high end workstations, smart phones, tablets, and a custom proprietary OS. Microsoft pretty much makes software, a licensable proprietary OS, a series of game consoles, and some mp3 players. Microsoft for the most parts creates software and lives on selling licenses. Apple is known as much for their hardware as for their associated OSes.

"Its hard for me to think of a single Apple product that MS does not have a direct competitor (and in some cases, competitors) to."Hmm... Desktop computers, laptops, mobile phones, wireless access points, photo, audio, and video pro level editing software, just off the top of my head? That's probably 60-70% of Apple revenues that do not have competing products made or sold by Microsoft.

It makes sense when you consider Apple started as a hardware company that, by necessity, expanded into software. Microsoft initially got into hardware (like mice) simply because they weren't that common on PCs at one point or had synergy with Windows, then later went into other hardware fields in order to expand their revenue stream by getting a foothold in other markets (which has largely been a bust for them).

So, when you get down to it, they both have a "tax" but it depends on what aspect of the IT industry you're talking about.

MS Expanded into the computer accesory business because they are cheap to make, and have high profit margins. This fact is the very soul of MS and is a prime example of why the Zune and the xbox have not been very profitable for MS.

Well, it's good for Apple shareholders, otherwise it's not that interesting.

Apple is doing great financially. Good, so they can keep the good work. But MS's example shines: having money doesn't make you an innovative company, competition does.

MS had no real rival during the 1999-2004 period (Apple was "coming back", Google was just a search engine and Linux was only 1%... oh, forget that part), thus: almost no innovation (Windows 2000>XP... Office 2000>XP>2003. Yeah right, huge changes).On PCs, almost every computer comes with Windows> no serious competitor (in market share terms).The vast majority of companies use Office, only a fraction of them use alternatives. Call it inertia or whatever, but it is there, and for a long time IMO.

Hasn't there been at least one Apple stock split since Microsoft bought those shares? Shouldn't Microsoft's potential profit from those shares, had it held onto them, be more like $9 billion?

[Edit:] Yeah, they have, in 2005 at 2 for 1, meaning Microsoft would have 36.4 million shares of Apple, so had Microsoft sold its Apple stock in April, it would have netted $9.14 billion, for some absurd ROI that I'm too lazy to calculate. That is, unless I missed something here; I'm not much of a math or finance guy.

it'll be interesting to see if apple can keep the top spot. im saying this because i find that there level of innovation has probably gone down in the last few years. they've barely made any changes to the ipod line other than improving the storage capacity and possibly adding a camera. even the ipad is meh to me. on the other hand ms is investing heavily in cloud based services and advertising through search which both can earn them loads of money, much more than selling mp3 players.

it'll be interesting to see if apple can keep the top spot. im saying this because i find that there level of innovation has probably gone down in the last few years. they've barely made any changes to the ipod line other than improving the storage capacity and possibly adding a camera. even the ipad is meh to me. on the other hand ms is investing heavily in cloud based services and advertising through search which both can earn them loads of money, much more than selling mp3 players.

It's likely they won't. Apple is a "story stock" in many ways, and people buy shares because they're into it (so many years of increasing value doesn't hurt).

But now their market cap has hit a psychologically important point, which makes me assume there will be people looking at the stock price going "do I really think that other people will continue to value this stock as they have been" and take a good hard look at their investment.

I'm not saying freefall, here. Orderly selling over a period of time, most likely.

it'll be interesting to see if apple can keep the top spot. im saying this because i find that there level of innovation has probably gone down in the last few years. they've barely made any changes to the ipod line other than improving the storage capacity and possibly adding a camera. even the ipad is meh to me. on the other hand ms is investing heavily in cloud based services and advertising through search which both can earn them loads of money, much more than selling mp3 players.

It's likely they won't. Apple is a "story stock" in many ways, and people buy shares because they're into it (so many years of increasing value doesn't hurt).

But now their market cap has hit a psychologically important point, which makes me assume there will be people looking at the stock price going "do I really think that other people will continue to value this stock as they have been" and take a good hard look at their investment.

I'm not saying freefall, here. Orderly selling over a period of time, most likely.

You don't invests in stock do you? And certainly won't make any money investing if that is your approach.

Every time I look at Microsoft's revenue numbers, my head explodes. Truly amazing.

Not as much of an explosion as the one were you realize that personal stock you bought when the company first incorporated has now made you a multi-millionaire. Double kaboom if you invested in both. Now where's my crystal ball?

The 150 million was largely symbolic. It's not like Apple actually needed cash at the time. What they needed was a signal that Microsoft was going to continue to support the platform with their popular software. Steve Jobs is a good showman. The deal was reported all over the place. In the long term the patent cross licensing is probably the biggest part of that deal.